Sovereign issuers may crowd corporates out in January bond sales
The ECB is barely half way through raising rates. Quantitative tightening will further raise the cost of debt in 2023, and is set to test bond market capacity.
The first two weeks of January are normally the busiest of the year in debt capital markets, as sovereigns, supranationals, agencies, banks and even corporates all attempt to jump-start their annual funding programmes with big new issues.
Investors normally have a lot of money to put to work. But this time, it could be tricky in Europe. Buyers had been getting a little over their skis in the run-up to the ECB meeting on December 15, hoping that, like the US Federal Reserve, it might hint at a coming slow-down in interest rate rises as they approach their peak.
The November and early December bond market rally had even allowed some banks and corporations to start pre-funding their 2023 programmes in the final weeks of 2022, until a hawkish central bank pronouncement put a stop to that.
The European Central Bank is behind the curve and playing catch-up with the Fed. It has revised its expectations substantially higher for eurozone inflation and – even though central banks are meant to have dropped forward guidance – points out that interest rates will have to rise "significantly" and "at a steady pace" to return inflation to target, and that only by keeping them at restrictive levels for some time will inflation expectations be restrained.